The government has slashed taxes for India’s middle classes, hoping the move triggers a spending spree that will jumpstart the sluggish economy.

But will it work? After years of ignoring pleas from salary earners for tax breaks, Union finance minister Nirmala Sitharaman’s Budget delivers a direct boost to millions of working Indians. The tax cut will “substantially reduce the taxes of the middle class and leave more money in their hands, boosting household consumption, savings, and investment,” the minister said.

Now, anyone earning up to Rs 12 lakh a year will pay no income tax. That’s nearly double the previous cap of Rs 700,000, putting more cash in the hands of over 80 per cent of taxpayers — or 63 million people. (Remember, India’s existing tax base is very small, at around 104 million people.)

The idea is simple: If the middle class has more to spend, the economy will get a badly needed boost. The economy has been growing at its weakest pace since the pandemic and now faces rising trade and geopolitical risks from President Donald Trump’s new administration.

Prime Minister Narendra Modi praised Sitharaman’s economic blueprint as a “historic people’s budget” that will propel growth.

The government estimates these tax cuts will cost the treasury over Rs 1 lakh crore, but it’s clearly decided it needs to take that gamble as the economy has been losing significant steam, growing at just 6.4 per cent this year.

The government forecasts the economy will expand by 6.3 per cent to 6.8 per cent this year. That’s well below the 8-per-cent target Modi needs to meet his goal of making India a developed nation by 2047.

With global uncertainties and market turmoil wiping out $600 billion from the value of India’s stocks in the last month alone, the government is facing a major problem. The focus on consumers is seen by some opposition politicians as a “last-ditch” plan.

Congress leader Rahul Gandhi derided the Budget as a “band-aid for bullet wounds. Amid global uncertainty, solving our economic crisis demanded a paradigm shift. But this government is bankrupt of ideas.”

For millions of taxpayers, the tax break will be a boon. “Around 25–30 million people will save roughly Rs 100,000 annually,” calculates Kamal Bali, president of Volvo Group India. That extra cash could mean purchases of more cars, home appliances, or even an easier time paying off loans.

Sonal Varma, an economist at Nomura Holdings, agrees that the move could help — but only marginally. “The tax cuts will lift consumption, but revenue targets look ambitious,” she warns. The government is counting on increased consumer spending to offset the loss in tax revenue, but some experts say that won’t be enough.

The Budget evoked scant enthusiasm from investors with both the Nifty and Sensex ending flat. Defence stocks were particularly hard hit, falling up to 9 per cent, after the government kept a tight lid on spending. But consumer goods and auto stocks were seen to be in favour as a result of the tax cut. In a bid to spur the growth of electric vehicles the government has scrapped the duties on lithium ion batteries which are essential for EVs.

While India’s economy relies heavily on infrastructure spending, this year’s outlay is broadly unchanged.

Despite the hefty cost of the tax cuts, Sitharaman managed to trim the Budget deficit to 4.4 per cent of the GDP, down from 4.5 per cent. She did this by tapping into funds from government-owned financial institutions and slightly increasing bond sales. The plan also includes cutting back on government spending, a move that has drawn mixed reactions from economists.

One thing the government was silent on was job creation. “Unemployment is the biggest crisis facing our economy, but she hasn’t talked about that at all,” said Congress leader Shashi Tharoor. “If you have a salary, you will pay less tax, but if you don’t have a job, where are you going to get that salary from? You need to generate more jobs in the economy, and there has been no sign of that,” he added.

There was more in the Budget, though, than tax cuts. Sitharaman also announced a slew of initiatives aimed at various sectors. There is a new policy to boost labour-intensive industries like leather and footwear. The government aims to make India a global hub for toy manufacturing.

The Budget proposes increased support for gig workers, with 10 million set to receive social security coverage.

The government unveiled a push for nuclear energy to power India’s future, with a goal of 100 gigawatts by 2047. It also announced a Rs 100-billion fund to support startups.

On the healthcare front, the government has exempted 36 life-saving cancer drugs from customs duties and pledged to set up daycare cancer centres in district hospitals over the next three years.

So far, the Budget has received mixed reviews. Investors hoping for a bigger infrastructure push were left underwhelmed. “The negative surprise has come from the shift of focus on government capex in infrastructure development,” said Gaurav Dua, head of capital market strategy at Mirae Asset Sharekhan.

"Clearly, the measures taken to boost consumption and provide relief to weaker sections of society have left little headroom with the government for capex allocation," Dua said.

Businesses, though, welcomed the focus on consumer spending. Some experts, like Anubhuti Sahay from Standard Chartered, see it as a strategic pivot: “Shifting away from public investment to boosting household disposable income is well-timed in an economic slowdown.”

On the fiscal front, analysts are less impressed. Tax relief measures will hit tax revenues, “which will rise at its slowest pace since 2022–23,” said Christian de Guzman, Moody’s senior vice president. “We do not expect a sufficient improvement in the debt burden… to change our broader assessment that India's fiscal strength will remain weaker than most of its investment-grade peers,” he added.

Other challenges remain. Global uncertainties, inflation, and weak private investment continue to loom large. The government is hoping that with more money in their pockets, Indian consumers will “spend, spend, spend” and turn the economic tide. One thing’s for sure: The middle class now holds the key to India’s economic future.